Should You Pay Off Student Loans or Buy a House
Brooke is a freelancer who focuses on the financial wellness and technology sectors. She has a passion for all things wellness and spends her days cooking up healthy recipes, running, and snuggling up with a good book and her fur babies.Read full bio
At a Glance
The years after college are an exciting time. You may be settling into your “adult” job and finally receiving decent paychecks for the first time in your life. But for many people, the grey cloud of student loan debt is still lingering overhead. And it may lead you to wonder, should you pay off student loans or buy a house first?
In this article, you’ll learn:
A Case for Paying Off Student Loans
There are several great reasons to consider paying off student loans before buying a house. These include:
When your interest rate is high
Many people consider student loans to be “good” debt since you have the asset of your education, and interest rates tend to be relatively low. And many federal loans do have reasonably low interest rates plus options to enter into income-driven repayment plans as needed. Federal loans may also be eligible for debt forgiveness programs that require you make payments for a set number of years.
On the other hand, private loans may have higher interest rates and none of the benefits of federal student loans. And it’s in this circumstance that you’ll want to assess how much you’ll save by paying off student loans before buying a house.
When your monthly loan payment is large
If you have a lot of student loan debt that generates a high minimum monthly payment, you may not have enough extra cash each month to pay your mortgage and all that comes with homeownership. If you’re set on buying a house while paying off student loan debt, you may need to find ways to increase your income, maybe through a raise at work, side hustle, or part-time job.
When your debt-to-income ratio is high
Excessive student loan debt could mean you’re paying a high amount of monthly income toward loans each month. And to qualify for a mortgage, lenders typically look for lower debt-to-income ratios. So if you’re already making loan payments that are 30-40% of your income each month, it may be best to wait until your debt burden is lower before applying for a mortgage.
If you’re managing multiple debts, you may also consider student loan debt consolidation. This can streamline your loans into a single monthly payment which may be easier to manage and help you lower your debt-to-income ratio faster.
When you’re stressed by loan debt
Student loan debt can feel overwhelming and stressful. And adding house payments on top of that can be enough to put you over the edge. So unless you have an income that can support managing multiple debts, it may be in the best interest of your sanity to pay off student loans before buying a house.
When to Buy a Home Before Paying Student Loans
There are situations where it may make sense to buy a house or save for a down payment before you tackle your remaining student loan debt.
Your rent is unaffordable
It may be counter-intuitive, but sometimes buying a house may actually cost you less than renting. This is especially true if you live in a high cost of living area. If you can find a home that’s reasonably priced and where you can manage mortgage payments and student loan payments, trading up your rental for a house may make sense.
You can rent out rooms in your home
Many first-time homebuyers find success in bringing on several roommates. That’s because roommates may pay enough each month to cover the cost of the mortgage, so you’ll have less of a financial burden. Plus, any extra you collect each month could be put toward your student loan payments. Talk about a win/win!
You need location stability
For those with children, moving each year from rental to rental may not be possible. So if you need to put down roots somewhere, buying a home can be the right path forward.
Should You Buy a Home or Pay Off Student Loans?
The answer to whether you should pay off student loans or buy a house really depends on your unique financial situation. And the truth is, you can do both! If your income allows it, you may be able to meet your student loan payments each month while siphoning off a bit of cash into a savings account for a down payment.
Before you buy a house while paying off student loans, you will want to consider the mental strain of managing multiple debts. Sometimes, the burden of being on the hook for two debt payments each month, especially if they’re large, is enough to make you want to knock out student loan debt first. And the peace of mind of having that debt off the table can free you up mentally, as well as financially, to move into a house with far less stress.
Is paying off student loans early worth it?
The decision of whether or not to pay off student loans early depends on the interest rate of your loans. Student loan debt is typically considered “good” debt because of the low interest rates of federal loans. But if you have private loans at a high interest rate, you could end up saving hundreds in interest over the life of the loan by paying off your student loan debt early.
Do student loans affect buying a house?
Mortgage lenders typically assess your debt-to-income ratio when gauging eligibility for a loan. So if your student loan payments are a large portion of monthly income, lenders may be less willing to extend you a loan. In that case, student loans do affect buying a house, and it may make sense to pay down that debt first.
What should I pay off first: student loans or house?
When faced with two debts, there are several strategies to determine which to pay off first. For example, you can use the debt snowball, which focuses on the lowest-amount debt first, or the debt avalanche, which starts with the highest-interest debt. Which option you choose depends on if you want to get a quick win and increase motivation or save the most money over time.